RBI warns of inflation:Costlier loans may impact festive season shopping; A-Z guide to repo rate

Inflation is certain to rise further, and borrowing from banks is also set to become more expensive. This is what the Reserve Bank of India or RBI, has said. The RBI has raised the repo rate from 5.25% to 5.50%. The repo rate has been increased for the first time since February 2023, nearly four years later. What is repo rate? It is the interest rate at which banks borrow from the RBI. The formula is simple: if the Reserve Bank lends to banks at higher interest rates, banks will lend to people at higher rates; people will then borrow less and spend less. Lower spending will help keep inflation under control. The Reserve Bank says the inflation rate could rise from 5.0% to 5.2% this year. It has also given some good news, saying that GDP, or the growth rate, could be 7.1% this year. After a three-day meeting of the RBI’s Monetary Policy Committee, or MPC, Governor Sanjay Malhotra announced the new interest rates today, 7 October. He also said that the repo rate could rise in the coming months, but would not fall. Interest rate cuts off the table for now The RBI has changed its stance to ‘calibrated tightening’. This means the possibility of interest rate cuts has been completely ruled out for now. In the upcoming meetings, the Reserve Bank will either keep rates unchanged or raise them further if necessary. Inflation projected at 5.2% for 2026-2027 GDP growth estimated at 7.1% in 2026-2027 The Reserve Bank has raised its estimate for the country’s economic growth rate from 6.7% to 7.1%. It expects growth of 7.2% in the second quarter (Q2) and 6.9% in the third quarter (Q3). The estimate for the fourth quarter has been retained at 6.8%. Learn the key facts about the repo rate through answers to four questions Question 1: Why did the RBI raise the repo rate by 0.25%? Answer: Governor Sanjay Malhotra said that rising crude oil prices, global pressures and adverse weather had increased the risk of food inflation. The RBI therefore wants to rein in inflation in time and maintain stability in the economy. Question 2: How will a rise in the repo rate affect ordinary people? Answer: Approximately seven out of 10 borrowers have interest rates linked to the repo rate. Therefore, the Reserve Bank’s decision will have an immediate impact on most loan customers in the country. Question 3: When could the repo rate be cut next? Answer: If inflation remains under control and economic conditions permit, the RBI may cut the repo rate further. At every meeting, the RBI decides on interest rates after considering inflation, economic growth, and domestic and global conditions. Knowledge Box: Where did the concept of the repo rate come from? During World War I in 1917, the tax burden on banks increased, making it expensive for them to borrow money. To avoid taxes and provide banks with money easily, the Fed introduced the repo system. Rules changed over time: Who can participate: Initially, only member banks were included. Primary dealers joined in the 1950s, and today both banks and dealers participate in it. Interest rates: Initially, it was based on a fixed discount rate. It was later linked to market rates, and today it is determined by the US Federal Open Market Committee (FOMC). Collateral: Government and war bonds were pledged at first. Later, Treasury securities and, after 1999, mortgage-backed bonds also began to be accepted. Current status: The structure of the repo has changed completely from 1917 to the present day. It is now the most important tool for controlling the flow of money, or liquidity, in the US economy and banking system. Other countries have also adopted the repo rate.